Frequently asked questions: Proposal for a Regulation on European Crowdfunding Services for Business

Brussels, 8 March 2018

What is crowdfunding and why is it needed?

Crowdfunding is an innovative funding opportunity that allows entrepreneurs to make an "open call" to the wider public for the collection of financial support for a specific business project. This is generally done through an internet-based platform, which matches the supply and demand of the funds.

Crowdfunding provides a much-needed alternative to bank lending, which is currently the main source of external finance for small and medium enterprises (SMEs). The type of bank lending currently available for entrepreneurs, start-ups and small enterprises is often expensive or difficult to access due to the lack of credit history or a lack of tangible collateral. The survey on the access to finance and enterprise (SAFE) identified the lack of funds as the second most important reason why start-ups fail. Crowdfunding is vital as it helps companies tap into new sources of funding. At the same time, it provides new investment opportunities for smaller investors and consumers.

Crowdfunding is particularly important in the early stages of business financing as it often is the main funding tool - apart from funds provided by family, friends and own funds.

Who invests in crowdfunding?

Crowdfunding investors are largely individual investors looking to commit a small amount of money to a project but also include institutional investors and venture capitalists.

How are crowdfunding platforms currently regulated?

Today crowdfunding is mainly conducted on the basis of national legislation, which means that platforms are subject to diverging rules depending on the country in which they operate. This makes it particularly difficult for platforms to provide their services cross-border. Several Member States have adopted bespoke regimes for investment-based and lending-based crowdfunding. A few other Member States do not specific rules but allow investment-based crowdfunding to be provided under Markets in Financial Instruments Directive (MiFID2) rules. A full description of the current legal context is provided in the impact assessment report accompanying this proposal.

What is the Commission proposing to change and why?

Many innovative companies face financing difficulties particularly in the early stages of their business. At the same time, smaller investors often do not find appropriate investment opportunities. While crowdfunding platforms are gaining importance as an alternative to bank financing on a national level, diverging legislation across the EU makes operating across-borders cumbersome. EU rules will make it easier for crowdfunding platforms to operate across other Member States. This will widen the pool of investors and the number of projects to pick from.

The Commission's proposal introduces an optional EU regime which enables crowdfunding platforms to easily provide their services across the EU Single Market. Instead of having to comply with different regulatory regimes, platforms will have to comply with only one set of rules, both when operating in their home market and in other EU Member States. For investors the proposal will further provide legal certainty as regards the applicable investor protection rules.

What are the benefits?

Today's proposal:

establishes a one-stop-shop access to the EU market and therefore helps crowdfunding platforms in overcoming the barriers they face operating cross-border;

provides tailored rules for European crowdfunding services providers covering both investment-based and lending-based business models;

gives more opportunities to European investors while safeguarding a high level of investor protection in relation to crowdfunding services;

defines the requirements crowdfunding service providers have to fulfil in order to get the authorisation and provides a single point of entry for authorisation and supervision by a single authority, the European Securities and Markets Authority (ESMA).

Which crowdfunding services will be affected by the proposal?

The Commission's proposal applies to those crowdfunding services entailing a financial return for the investors. The financial return model is either investment-based crowd funding, consisting of transferable securities (shares and bonds) issued by the company that raises funds, or it is lending-based crowdfunding consisting of entering into a loan agreement.

Reward- and donation-based crowdfunding fall outside the scope of the proposal since they cannot be regarded as financial services. Consumer lending falls outside the scope as well, given this service is already covered by other EU legislation such as the Consumer Credit Directive or the Mortgage Credit Directive.

The Commission's proposal envisages several mechanisms to protect investors:

Investors will be informed about the risks associated with crowdfunding and will be warned about the inadequacy of these instruments as saving products. Crowdfunding webpages will need to display a series of disclaimers and recommendations to that end.

Before having the possibility to invest, investors will need to take a knowledge test aiming to assess their understanding of financial products. They will be offered the possibility to assess their ability to bear financial losses. Should the resulting investor profile show excessive vulnerability, a clear disclaimer would warn the investor that the service offered is not appropriate for them.

Crowdfunding service providers and project owners will have the duty to disclose a comprehensive set of information for each crowdfunding offer in a clear and transparent way to allow investors to assess the risks before investing. This includes information about the project owner and the crowdfunding project, the main features of the crowdfunding process and conditions for raising funds or lending money, information related to the securities, information on the issuer, investor rights, fees, and legal redress. All this information must be included in the KIIS (Key Investor Information Sheet).

Crowdfunding service providers must obtain the best possible result for their clients when exercising discretion in how they carry out clients' orders. They will have the duty to avoid and prevent conflicts of interest – such as having any financial participation in the crowdfunding offers on their crowdfunding platform. Platforms will be prohibited from accepting fees to induce clients towards certain projects.

How does the proposal ensure that risks posed by crowdfunding activities are managed appropriately?

The proposal subjects platform managers to reputational obligations, which includes not having any criminal record under anti-money laundering legislations. The proposal also requires that all funds and payments for crowdfunding transactions cannot take place via entities that are not authorised as Payment Service Provider under the Payment Service Directive (PSD2), whether the payment is provided by the platform itself or by a third party. In addition, National Competent Authorities (NCAs) are obliged to notify ESMA of any issue that is relevant under the Anti-Money Laundering Directive (AMLD) and involving a crowdfunding platform. ESMA can then withdraw the license based on this information. The effectiveness of this framework will be reviewed after two years of application.

Which authority will be in charge of authorising and supervising platforms?

The European Securities and Markets Authority (ESMA) will be in charge of authorising and supervising crowdfunding service providers. ESMA is given powers to perform controls, investigations and on-site inspections in order to effectively perform on-going supervision. ESMA will also have the power to impose fines and to withdraw the authorisation in case of serious infringements of the rules.

What preparatory work has been done?

The proposal is the result of extensive studies, desk research, workshops and stakeholder consultations. Four public consultations have been organised between 2013 and 2017, and stakeholders' responses have been taken into account while drafting today's proposal.

Furthermore, a series of workshops were conducted to consult Member States, trade bodies and their members. Two regulatory workshops on crowdfunding with Member States were held in December 2014 and February 2016 in the context of the Expert Group of the European Securities Committee (EGESC).

What are the next steps?

The proposal will now be discussed by the European Parliament and the Council.